Wednesday, May 17, 2006

Genghis Con Job

Diane Francis column Wednesday may 17:

Mongolia will be kicked into the economic dark ages if its President signs a draconian law passed last week which virtually confiscates all mining operations.

And the Canadian government should get involved. Ottawa should issue a stern rebuke given the damage that will be caused to Canadian companies and their investors who have poured millions into Mongolian exploration and operations in good faith.

Canada's mining industry dominates exploration and development in that country. Hundreds of Canadian companies, led by Ivanhoe Mines Ltd. and Centerra Gold, will be adversely affected by the law which abrogates agreements made with the industry since the collapse of communism there in the early 1990s.

Their shares fell dramatically this week on news of the tax which was passed late last Friday night. It must be signed by the President of Mongolia to become law.

"The problem with Mongolia is that there is a lot of government there, but no leadership," said mining consultant Terry Ortslan with TSO & Associates in Montreal. "This will look bad on them and if the President signs this legislation, mining activity will dry up."

The proposed windfall profits tax would allow government to grab 68% of the prices above levels not seen in several years. For instance, the government would take 68% of copper prices above $1.18 a pound. It's currently trading as high as $4 a pound. It would take 68% of gold prices above $500 an ounce. Gold is currently above $700 an ounce.

Centerra, spun off from Saskatchewan's Cameco Ltd., is producing gold in Mongolia and will be immediately impacted. Ivanhoe is still exploring and has yet to sign a binding agreement with the government there.

Mongolia's parliamentarians appear to have been swept up in a form of misguided economic nationalism aimed at grabbing revenue in light of record commodity prices.

Threats of new royalties, and more drastic measures, are sweeping Indonesia, Africa and parts of Latin America. Venezuela is threatening to nationalize its oil industry. Bolivia recently seized gas fields. Peru is talking about high royalties after the fact on mining operations.

"Mongolia is not unique," said Ortslan.

But what was unique about Mongolia was its business-like approach to attracting exploration. Its Mining Act was drawn from similar laws in Australia, Canada and the United States and offered great incentives for companies to explore and promised to reward success.

It was the most generous regime in the world which was necessary to attract activity to a hostile, cold, landlocked and remote country perched atop China.

I visited the country in August and its officials sounded convincing.

"Mongolia looks forward to becoming a mining powerhouse," said Mongolia's Minister in charge of resources, Lursanvandan Bold, in an interview in his office in Ulaan Bataar last August. He spoke flawless English and German to a group of European money managers assembled to learn about the country's mining regime. '

"Last year, 4% of all exploration dollars spent around the world were invested here," he said. "We are now one of the top ten exploration destinations in the world and the only Asian country in that list."

The country had a right to be proud. 'Currently, there are 6,000 licenses for exploration and mining granted to 800 companies. Nearly one-third of its total land mass, which is three times' bigger than France, has been licensed for exploration.

The country is an Asian version of Canada complete with its cold climate, space, sparse population and resource wealth which includes everything from oil and natural gas to coal, uranium, gold, copper, lead, zinc, rare earth elements, phosphorite and silver. There are also discoveries of massive underground water reserves beneath the Gobi.

But last week's events show that its politicians seem bent on reneging on their promises.

This will cost the country its credibility and prove to be an enormous mistake. Mongolia will revert to its backward state. Before the 1997 Minerals Act, the country's mining industry consisted of a handful of foreign explorers and a few inefficient Russian mines in operation.

"The Russians have a gigantic, joint venture mine with Mongolia and will be furious over this," said Mr. Ortslan. "That mine represents half the trade earnings for the entire country."

Ivanhoe Chairman Robert Friedland was one of the first to be attracted to Mongolia and within short order his geologists made a massive copper-gold discovery, Oyo Tolgoi. Ivanhoe has been spending US$10 million a month drilling holes, testing results and pouring a gigantic concrete shaft in preparation for production.

Ivanhoe's find is Mongolia's flagship mining prospect and helped spawn a mining boom in this landlocked country of 2.5 million Mongols and 40 million livestock.

"It's unfortunate for Mongolia to make such a major error. They are sending a message to the world. The President should come out and say he's not signing it and that the country keeps its promises."

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Next book March 2008: "Who Owns Canada?" to be published by Harper Collins. It is about Canada's 75 billionaires, half of whom have never been interviewed before and the transformation of the Canadian economy.